Good morning, and welcome to the First Quarter 2019 Pilgrim's Pride Earnings Conference Call and Webcast. [Operator Instructions]. At the company's request, this call is being recorded. Please note that the slides referenced during today's call are available for download from the Investor Relations section of the company's website at www.pilgrims.com.

[Operator Instructions]. I would like to now turn the conference over to Dunham Winoto, Director of Investor Relations for Pilgrim's Pride. Please go ahead..

Good morning, and thank you for joining us today, as we review our operating and financial results for the first quarter ended March 31, 2019. Yesterday afternoon, we issued a press release providing an overview of our financial performance for the quarter, including a reconciliation of any non-GAAP measures we may discuss.

A copy of the release is available in the Investor Relations section of our website along with the slides we will reference during this call. These items have also been filed as 8-Ks and are available online at www.sec.gov. Presenting to you today are Jayson Penn, President and Chief Executive Officer; and Fabio Sandri, Chief Financial Officer.

Before we begin our prepared remarks, I would like to remind everyone of our safe harbor disclaimer. Today's call may contain certain forward-looking statements that represent our outlook and current expectations as of the day of this release.

Other additional factors not anticipated by management, may cause actual results to differ materially from those projected in these forward-looking statements. Further information concerning those factors has been provided in today's press release, our 10-K and in our regular filings with the SEC. I'd now like to turn the call over to Jayson Penn..

Thank you, Dunham. Good morning, everyone, and thank you all for joining us today. It's a pleasure to join you this morning on my first earnings call as the CEO of Pilgrim's. It's an honor to serve in this role, and I'm extremely excited to be leading this team to capitalize on the many opportunities we have ahead of us.

Before we begin, we would like to express our gratitude to Bill Lovette. We wish him all the best and thank him for his leadership for defining our strategy, executing it, extracting outstanding results, who put us where we are today as a global leading producer of chicken.

Since we began our journey 8 years ago, we have considerably improved our relative performance, margin profile and minimized volatility from specific market segments. My 30-year experience in the chicken industry has taught me the value of people and quality.

Moving forward, we will be placing additional resources in these 2 areas to differentiate ourselves further from the competition. We're extremely fortunate to have great team members, and we will continue to invest in our people as well as innovate and improve the quality of our products.

We will continue to execute on our existing strategy, which has made us a leader. We will focus on people, good safety and quality, relentless pursuit of operational excellence, and persist on key customers and optimizing a mix of our portfolio.

As part of the management team, that originally developed this strategy, I'm deeply committed to continue executing this methodology as a base for our future growth. Our key customer approach has been success, and we'll continue evolving to be even a more valuable partner.

We have materially improved our competitive position with a diversified portfolio of on-trend products and brands. We significantly strengthened our presence in Mexico, and extended our international footprint to the U.K. and Europe giving us a leadership position worldwide.

We are committed to continue extracting operational improvements, strengthening our growth profile and delivering even better, more consistent financial performance.

For the first quarter of 2019, net revenues were $2.72 billion versus $2.75 billion from a year ago, resulting in an adjusted EBITDA of $204 million, or an 8% margin versus $272 million a year ago or 10% margin.

Adjusted net income was $87 million compared with $132 million in the same period in 2018, resulting in an adjusted earnings of $0.35 per share compared to $0.53 per share in the year before. We'd like to thank our team members for producing a solid start for 2019.

Despite facing differing market environments across our global footprint, we were able to deliver a sequential increase in performance. In the U.S., we experienced a much better environment, particularly in commodity large bird deboning. Momentum in our prepared foods business has continued and the improvement has been accelerating.

Input cost headwinds in Europe have continued to impact the operations during the quarter. In Mexico, we countered softer-than-expected seasonal performance. The Q1 results, once again, illustrate the effectiveness of our portfolio strategy, which gives us a well-balanced consolidated performance despite the volatility of specific market segments.

We'll continue to refine our portfolio to better adapt and respond to individual market dynamics to give us a better relative performance over the competition. We believe this approach will give us a higher and more consistent results for the mid-to-long run and minimize the full peak and trough of the volatile commodity sectors.

We will also leverage our key customer strategy to earn more business and drive increasing growth beyond just the underlying market conditions. Following a very challenging market in 2018, U.S. commodity large bird deboning rebounded well and improved sequentially through Q1.

As we indicated on our last call, we saw an earlier than seasonal increase during December and the momentum was maintained throughout the quarter and then to Q2. Commodity boneless prices have already exceeded the levels comparable to the a year ago and are close to the 5-year average, and wing prices are near historical high.

While we typically see a seasonal uptick in overall chicken demand during Q1, as we see more chicken consumption after the holidays, we believe this year, the increase is even more pronounced as retailers, foodservice operators and consumers are recognizing and reacting to the attractive prices for chicken.

After promoting beef and pork for much of last year, retailers and QSR operators are back to more normal chicken featuring activities, also given the evolving global situation of ASF, African Swine Fever, more pork and beef are removing out of the U.S. and reducing overall domestic availability, which is positive for chicken demand and pricing.

We believe these are favorable signals for the upcoming summer growing season, and we expect to have further pickup in demand for chicken. In the other less commoditized sectors, customer demands was in line with normal seasonality.

Our leading positions in these markets and differentiated product offerings have continued to give us competitive advantage relative to our peers with a more narrow market approach.

The margin stability within our small bird and case-ready operations has continued to provide us with a strong and consistent margin platform, while our present and large bird deboning provides for the potential we capture the upside. We remain committed to deploying our key customer strategy to drive greater overall growth.

Revenues from key customers have more than doubled over the last 8 years, reducing our relative dependency on pure commodity sales. Beyond driving more growth, our key customer approach promotes us. It enhances long-term relationships and strengthens our market structure.

We are continuing to increase the percentage of specialty birds, including no-antibiotics-ever and organic attributes, and expect them to be over 40% of our U.S. portfolio during 2019, up from less than 20% just a few years ago.

Mid-last year, we moved one of our large bird deboning plants to full NAE, the first full one for us in this size category, in support of the plants to double our NAE contracted volume of large bird deboned offerings in 2019 versus 2018.

We are expanding our breast meat portioning capabilities and increasing our dark meat deboning capacity by 25% to deemphasize our exposure to the volatility of pure commodity markets.

We're continuing to install more front-half automatic deboning equipment to support growth for multiple key customers, while minimizing the impact of tight labor conditions to optimize our margins. As the largest producers of small birds in the industry, we are well positioned to benefit from the positive market dynamics.

We expect supply in this category to continue to be constrained as producers are not adding more capacity, and likely to continue to trim production or even move away from the segment, resulting in much more resilient pricing versus other sectors. Within Prepared Foods, our results are accelerating in pace.

We grew a robust 17% in revenue and 15% in volumes year-over-year during Q1, respectively. We've been heavily investing in our U.S. Prepared Food's business to increase our capacities and capabilities to meet customer expectations.

Our key members are driving growth, while continuing to pursue future opportunity for more concentrated efforts in innovation and marketing. The investments in these operations and the focus of our people have yielded an increase and performance, and further growth prospects remain available.

We are generating the expected performance and are very pleased with the results. We anticipate Prepared Foods to account for a larger portion of our total results over the next few years and to continue to reduce the volatility of our commodity sales mix.

We continue to build out innovation capabilities in the branded business, and we will be launching new prepared foods items in both the Just BARE chicken and Tobryn [ph] brands. There's also Just BARE chicken new item development in progress in deli and in the fresh meat case.

In addition, we continue to increase the distribution of Just BARE, expanding into the California market, and we'll grow with Amazon as they build out their fresh grocery delivery business.

We're supporting the branded business with advertising, continuing the "Who Makes Your Food" campaign for Just BARE chicken, featuring our growers and expanding the campaign to capitalize in the summer growing season, in addition to supporting the Just BARE accessory with digital and radio advertising.

Just BARE chicken packages from our state-of-the-art facility in Minnesota feature a trace code, allowing you to learn where your chicken was raised. We're also supporting the Pilgrim's brand with advertising, leveraging the work of our team in Mexico.

All of these initiatives strongly support our branded business and are driving growth with key customers. Our export business performed well during Q1, and we expect the strength to be sustained. U.S. frozen inventory is at record lows and expect export pricing has correspondingly increased approximately 16% from the end of Q4. Even with this, U.S.

export dark meat prices continue to represent an attractive value relative to other proteins. We're continuing to improve our dark meat mix away from pure commodity to further strengthen our margin profile.

We're diversifying our country of destination mix in a relentless and developing alternative sales strategies in the event we encounter any trade disruptions due to animal diseases or unfortunate and unforeseen disputes with existing trade partners.

We experienced weaker-than-seasonal market conditions in Mexico during Q1, better-than-expected growing conditions and softer seasonal demand of dampened prices. Chicken demand was also affected by more availability of imported pork from U.S.

during the quarter, but we believe chicken demand can continue to grow in line with historical rates longer term. The environment has already started to recover in Q2 and prices have begun to react positively with growing conditions reverting back to normal, demand improving and competition from pork imports declining.

Our team is focused on operational excellence and offering differentiated products continues. We grew volumes by more than 20% in Prepared Foods in Mexico during Q1, which is a record. As part of our strategy to strengthen our competitive positioning, we are maintaining the pace of new, innovative product introductions.

Our Prepared Foods business is growing in a double-digit rate and generating excellent results under both premium and Del Dia brands, both of which have continued to receive very favorable acceptance by consumers at retail, club stores and QSRs.

In line with the whole industry, our European operations continued to be impacted by a significant increase in input costs, including wheat ingredients, mainly wheat, due to the prolonged hot weather last year as well as significantly higher utilities, labor and packaging.

These increases resulted in excess of $18 million in the quarter of which $13 million were partially offset by cost-reduction initiatives, synergies and price adjustments of some of which have taken longer than expected to be passed on and reflected in the contracts. Volumes are flat year-over-year, but 2% higher sequentially versus Q4.

Despite the reduction in results, we are starting to see an improvement month-over-month as we adjust our prices based on our key customers' contracts and expect a full recovery within our pricing models. We're also entering the barbecue summer season, and we can expect profitability to return to at least similar level seen last year.

We will continue the emphasis on cost optimization, cost control, synergy capture and a culture of constant innovation.

We are nearing the end of the integration process, and we have a key, the run rate, above our initial expectations of capturing $50 million in synergies over 2 years, which includes benchmarking operational efficiency and productivity, increasing the yields and optimizing labor at our European operations.

Similar to our experiences in other regions, our key customer strategy has helped us to create a more resilient margin structure and will support our efforts to pass on prices or mitigate through value engineering, increases and input costs and changes in the market environment.

Also, as a part of maximizing the cut out, our team is driving for increased focus on the whole carcass utilization by opening up more opportunities and diversifying in new markets for dark meat, offal and other products.

This increased operational focus is paying off as our European operations, despite a tough first quarter, has continued to perform better than the competition on a relative basis.

Beyond the immediate term, we're looking to deploy capital and opportunities across Europe to drive our future growth, both organic and inorganic, and further improve overall diversification of the portfolio and footprint. Freight prices fell in the first quarter reflecting the increase and expected inventories of corn in the U.S.

USDA is currently forecasting for an ending stock at 2.03 billion bushels up to 1.78 billion bushels to the start of the quarter. Large production increases in South America are currently hurting the export competitiveness of U.S. corn, which is driving the surplus higher.

Farmers are projected to increase planted acres to 92.8 million acres, up 3.6 million acres from last year, which could further add the 2019 surplus. Soybean meal prices remain low, reflecting large U.S. surplus as well as recovery of production in Argentina, the world's largest soybean meal exporter.

Large ending stocks as well as weakened demand from ASF in China should keep prices in check. With large surpluses, both corn and soybeans, we do not except these costs to be a headwind to margins in the medium term. 2019, the USDA is expecting total U.S.

chicken industry production to grow at a rate below last year, while breeder egg performance is marginally improved recently has led to increased excess. The industry has not seen similar improvements in hatch rate.

Latest pullet data, which can be volitate, shows increased pullet placements over the last quarter with much of these likely supplying new facilities. Despite the announced new capacities, we believe some of the new plants are intended to replace existing Saturday schedules, while a tight labor environment in the U.S.

and a difficult market conditions last year are likely to weigh on at least some of the expansion plans. As a result, we believe capacity growth will not be disrupted for the industry supply/demand balance in the mid to near term.

Despite the expected growth in beef and pork production, final approval and implementation of new trade agreements with trading partners should gradually reduce the amount of domestic protein availability, drive prices of continuing needs higher, to support an increase in chicken demand.

Another important factor affecting supply/demand balance in chicken is the ASF outbreak. The spread and evolution of ASF globally could have a significant impact on the fundamental balance of chicken market conditions. First, it should drive reduction in domestic availability of competing proteins as well as increased demand for U.S.

chicken globally above and beyond the resolution of any trade negotiation. Second, regions impacted by ASF will likely consume less soy meal, giving us an even more benign feed environment, considering the already large domestic carryout in the U.S. soybeans, along with large South American harbors.

The outlook for chicken demand in the less commoditized segments this year continues to be very solid overall, and supply/demand their remains in good balance. With the U.S. economy continuing to be strong, low unemployment and higher disposable income are driving households to consume more proteins throughout the day.

Foodservice operators are already starting to turn their focus to chicken, and we expect more feature activities by retailers this coming summer.

While we're already well-balanced in terms of our bird size exposure, we will continue to seek opportunities to incrementally shift our product mix and reduce the commodity portion of our portfolio by offering more differentiated products to key customers while also optimizing our existing operations by pursuing operational improvement targets.

We believe our key customer approach is strategic and creates a basis to further accelerate growth in important categories by providing more customized, highly quality innovative products to give us a clear competitive advantage.

Before I turn it over to Fabio, I like to recognize the great work of our team in executing our strategy, which produces a clear long-term margin advantage versus our peers in this dynamic and cyclical industry. Our portfolio is specifically designed to minimize the impact from the cyclicality of specific market segments.

The changes we initiated 8 years ago have made a tangible difference. The result is evident in all 3 geographic regions in which we operate. It magnifies our relentless pursuit of operational excellence and presence in diverse and differentiated business models, segments and channels.

In the long term, we're dedicated to continue extending our competitive advantage by increasing the emphasis on investments in our people and innovation, while improving the overall quality of our products. With that, I'd like to ask our CFO, Fabio Sandri to discuss our financial results..

Thank you, Jayson, and good morning, everyone. For the first quarter of 2019, net revenues were $2.72 billion versus $2.75 billion from a year ago, with an adjusted EBITDA of $204 million or an 8% margin compared to $272 million or a 10% margin for the year prior. Adjusted net income was $87 million versus $132 million the year prior.

Adjusted EPS was $0.35 compared to $0.53 the year before. Operating margins were 6.1% in the U.S., 2.9% in Mexico and 2.5% in Europe. Our EBIT in U.S.A. was $150 million. Small bird and case-ready continue to be consistent markets, as chicken has remained competitive to consumers, despite higher availability of other proteins.

In contrast to the second half of last year, large bird deboning recovered strongly contributing to a sequential improvement in U.S. business. The rebounding price and demand helped for the entire quarter and has continued as we enter Q2.

We expect to see a better supply and demand dynamic in the domestic market, driven by more exports of all proteins out of U.S, as trade issues are getting resolved and to satisfy global demand due to the ASF outbreak. Both retailers and QSRs, operators are also learning more chicken features in Q1 as well as Q2.

And we expect a normal seasonality during the barbecue season this year to boost demand. Our fresh volumes were in line last year with downtime for equipment install in 2 of our facilities compensated by better productivity in all of our other operations.

We remain committed to deploy technology along with other resources available to counteract tight labor conditions and improve the consistency of our margins with more value-added differentiated products. Our U.S. Prepared Food sales has continued to improve relative to last year with an accelerated pace.

Revenue has increased 15% and volume has grown 17% relative to last year. The investments we made in the past few years have begun to produce results, and we believe we have more positive results to come.

We have additional initiatives in place to accelerate growth in this market, and we're expecting it to contribute a greater portion of our total sales in the next few years while adding to the stability in consolidated margins. Our EBIT in Mexico was lower than expectations at $10 million.

The market was impacted by superior growing conditions for chicken, while softer-than-seasonal demand due to more imported pork has further curbed the prices. At the closing of the quarter, the environment has already started to improve and local prices reacted sharply.

Demand is better with improved customer confidence, also helped by a slowing pork imports, along with our return to more normal growing conditions for chicken.

We have a very strong team in Mexico, who has been overdelivering performance for us in terms of relative performance to the major competition in the past few years due to their strong operational focus and excellent determination, and we expect this trend to continue in the future.

Quarter-over-quarter can be quite volatile in Mexico, like the last year proved that Mexico has been very consistent on a year-over-year basis. To maintain our growth and continue to innovate, we have launched fresh chicken in Mexico under the premium Pilgrim's brand, including no-antibiotics-ever, which have continued to see strong demand.

Also, we're growing our Prepared Foods opportunity in Mexico and producing excellent financial performance through both the Del Dia and the Pilgrim's brand, which have received great acceptance by consumers.

Signifying the potential opportunities we mainly had, we grew volumes by more than 20% in Prepared Foods in Mexico during Q1, which was a record. Our strategy is supportive of the goal to increase our higher margin, differentiated products while having product coverage from entry level to premium both fresh and prepared in Mexico.

EBIT in Europe was $30 million, recapturing all of our expected synergies and operational improvements, and we remain confident about the geographic diversification and growth potential for us, while evolving our portfolio and creating a sustainable advantage to opportunities to capture the upside in the market, but protecting the downside.

Although, we have made good progress in terms of optimizing the product portfolio, operational synergies and implementing zero-based budgeting, we were impacted by the higher costs, as Jayson already mentioned, in meat ingredients and other inputs that will still need to be passed to or processed through our formulas and contracts, but creates a temporary compression of our markets.

The challenging conditions in the input environment is currently affecting the whole industry. And to offset that impact, we'll continue to focus on increasing efficiencies across the value chain by enhancing sourcing and production, improving life costs, good improvements and the global management of feed sourcing.

We will leverage our marketing and sales infrastructure to optimize SG&A costs, and the increase in operational focus is paying off, as our European operations, despite the tough first quarter, have continued to perform better than the competition on a relative basis.

In Q1, our SG&A was 3% of sales, reflecting our support for expanding the Just BARE brand nationally and the investments for our new Prepared Foods products both in U.S. and Mexico. We're targeting $125 million in operational improvements for 2019, as we continue to extract improvements in the efficiencies of our operations.

Our target for 2019 is way lower than the previous year as we have to offset tight weather conditions as well as changing input costs environment in Europe as we mentioned.

We will continue to prioritize our capital spending plans this year to optimize our product mix that is aimed at improving our ability to supply innovative, less commoditized products and strengthening our partnership with key customers.

We expect to invest $285 million on CapEx and reiterate our commitment to invest on strong return over capital employed projects, that we improve our operational efficiencies, and tailor customer needs to further solidify competitive advantages for Pilgrim's.

Our balance sheet continues to be strong, given our continued emphasis on cash flows from operating activities, focus on management of working capital and disciplined investments in high return projects. During the quarter, our net debt reached $1.9 billion with the leverage ratio of 2.6x, less 12 months EBITDA.

Our leverage remains at a good level, and we expect to continue to generate strong cash flows this year, increasing our financial capability to pursue our strategic options. We expect 2019 interest expense in the range of $130 million. We have a strong balance sheet and a relative low leverage.

We remain focused on exercising great care and ensuring that we create shareholder value by optimizing our capital structure, while preserving the flexibility to pursue our growth strategy, and we continue to consider and evaluate all relevant capital allocation strategies that will match the pursuit of our growth strategy and will continue to review each prospect accordingly to our value-creating standards.

Operator, this concludes our prepared remarks. Please open the call for questions..

[Operator Instructions]. Our first question today comes from Ben Theurer with Barclays..

Congratulations on the results. So my two questions. So first of all, the one thing and you've mentioned it already within the prepared remarks, but I wanted to follow-up on feed cost in the U.S. I mean, clearly, you said with ASF affecting pig herd, particularly in China.

There is, obviously, less demand for soy in that market, which should further drive costs down. Have you done any hedging into summer? Have you've done locked in some of the low-price environment to, kind of, have a better planning capability around the cost, considering it's been relatively low recently? So that will be my first question.

And then my second question is you've also spoken a little bit about the foodservice feature activity.

How much is that, would you say, higher compared to last year? And what would you expect from the retail segment in terms of the follow-up on feature activity? Just to get a little bit of a sense where we're going into particularly, 2Q and 3Q, which are definitely the most important ones from a feature activity?.

Yes. Sure, Ben, I'll take this question. So we've seen a big recovery in supplies in both the U.S. and other major exports for both corn and beans. Prices shouldn't be a headwind to margins in the medium term. Our approach to the market hasn't changed, and we're going to secure our needs consistent with our view of the rest of corn and soybeans.

Relative to ASF, we're seeing significant demand losses in China from both corn and soybean meal. Soybean meal trades is getting affected more considering China's market for the share of global trade, which is about 75%. China's core market is much less important to the global corn trade.

In regards to hedging strategies, we don't disclose our strategy there. Regarding your question on foodservice, Ben, from the major QSRs, we've seen a 41% increase, quarter-over-quarter, relative to increased LTOs from a foodservice perspective. I'll carry that on to a retail perspective in '18 over '17, we saw a 23% decrease in retail features.

And '19 over '18 in Q1, we saw 11% increase year-over-year in feature. So we're starting to see the features come back for chicken. If I carry it forward then I would tell you that based on what we're hearing from our sources on the buy side, the major concern is the uncertainty of the pork market.

So as this cash and futures markets continue to diverge in the lean hard markets, our buyers are telling us that they are not going to be risking the potential upside of that pork market, and they are going to be continuing to feature more chickens this growing season..

Ben, in the foodservice sales, measuring the broad line distributors, we are having 7% to 8% increase in chicken sales. Some parts are actually seeing a much better performance than last year with wings going up 13%, breast meat going up 8%. So we're seeing a great pickup in demand in the broad line foodservice..

Our next question comes from Heather Jones with Vertical Group..

Congratulations, Jayson, on the new position. So I had -- one of the follow-up question to Ben. So speaking of retail feature, we saw a step back ahead of Easter. And over the past week, we've seen the jumbo BSP market come down a few cents.

And just wondering if you could give us your assessment of what's causing that weakness? And when you expect retail feature activity just tick back up in Q2?.

Yes. Heather, thanks for the question. Relative to the big bird markets are receding a little bit, that doesn't concern me as much. I'm really looking forward to this, sort of, the beginning of the grilling season when these features start to come back. I think there's typically a low right now relative to the features. So we typically see a low here.

In some cases, we've seen some upside, but this situation does not concern me at all relative to where we are on jumbo pricing, because again, as I answered Ben's question in this way, we're hearing on the buy side that the retailers are looking to do more chicken featuring just because of the uncertainty they are seeing in the pork markets..

And also, of course, jumbo is very important. Jumbo boneless breast is one of the most important parts of the bird and one of the regions we grew more in U.S., but we're seeing a great pickup in the other parts. So we've seen leg quarter is much higher year-over-year with the increase in exports and the increasing in prices.

Also, wings have come to the normal increase year-over-year. So the jumbo cutout is actually going higher, despite boneless being mid-flat, as Jayson mentioned prior..

Yes, that's excellent point; it leads to my next question. You mentioned increasing your dark meat and learning capabilities by, I think, it was 25%.

Do you have flexibility in that? Because from what I understand, a few months ago, there was nearly a $0.20 advantage in deboning, but with the rally, in quarters we've seen that advantage has narrowed greatly. And given your comments on ASF and export demand and all, it could potentially go away completely.

So I was just wondering -- and this deboning capabilities that you're adding, do you all have flexibilities to switch back and forth?.

Heather, we do have some flexibility, but I'll tell you following these dark meat markets for 25 years, what happens is that you'll see a leading indicator of leg quarters fall and then you'll see right behind it, you'll see the deboning numbers come back together.

So it's a -- there is -- on the front end, we'll see a spread, and then we'll also see that spread narrow as the meats catch up fairly quickly. Same on the downside. We see on the downside, if leg quarters start to move the other way, the deboned meat will stay high and then they will descend to the leg quarter numbers.

So there's always a natural spread between the cutouts of whole eggs to leg quarters to drums and thighs, et cetera. So the concern really for us is not really worried about that temporary spread. We have a strategy that's to debone more legs to not decommoditize, and we'll continue to follow that strategy..

Also to help us keep just lastly the full portfolio, Heather, I think it's important to have both of the parts and not enter and exit the market. Just like Jayson mentioned, we can't have a little bit of flexibility, but the strategy is to add value to those parts..

Our next question comes from Ben Bienvenu with Stephens..

I wanted to ask about Mexico. You talked about supply/demand's backdrop improving sequentially month-over-month into 2Q. I was curious to get some update on progress you're making with zero-based budgeting and portfolio refinement.

And then I think at the end of 4Q, you had talked about, while quarter-to-quarter is volatile, you thought that full year might be similar to last year-over-year.

Do you still expect that to be true? And just any commentary you can provide on those results stabilizing for the balance of the year would be helpful?.

Yes. On the year-over-year, I think we've seen this volatility in Mexico. Sometimes we have disruptions because of exchange rate, sometimes we have disruptions because of the elections there. So last year, we saw big volatility with a strong first semester and a weak second semester. The seasonality in Mexico is a little bit different than U.S.

But to your point, we continue to expect this year to be at the same levels as last here. The disruptions in Q1 were mainly due to some issues that Mexico had on gasoline distribution, and also, as we mentioned, the impact of the exports of pork from U.S. at the very lower price from Mexico.

As trade resumes to other regions and as the prices of pork has increased in the domestic market, we are seeing a reduction in that competition in Mexico. And also growing conditions in Mexico were better than expected, which created a little bit increase in the production of chicken for Q1.

For Q2, we're returning to the normal growing conditions and all the players are also adjusting their production to the supply and demand situation, and we're seeing a much better improvement in the supply and demand in that region..

And just to add, we have a positive outlook on Mexico. We've got a great team down there. They run a very consistent business. And I think as Fabio mentioned, you can't compare them over individual quarters, but when we string those quarters together, they had very solid and we have a very consistent business in Mexico.

Again, this is -- this situation is mostly supply related. We saw less disease pressure in this Q1 that more than normal seasonal supply outstrip the Q1 demand. So again, I'll hurry on to say that our Q2 results in Mexico are off to a great start..

I think, again, to the portfolio question, we continue to develop our branded products in Mexico. Still have a very important part of the market as live sales. So sell live birds to wholesalers, who process those birds to small consumers. We want to reduce that part of our portfolio.

We continue to invest in our Prepared Foods, especially in the north part of Mexico..

That's just helpful commentary. Then I wanted to ask about Moy Park.

To what extent -- or if anything, what have you done strategically, operationally, the contingency plan for Brexit? And just updated thoughts on your positioning with respect to that potential in that down the road?.

Yes. Sure, Ben. I'll start and I'll kick it over to Fabio. There are many puts and takes with either direction that Brexit takes. Our expectation is that the margin effect is going to remain mostly mutual. And just as a reminder, 93% of our U.K. production remains in U.K.

So since 2016, our team has been contingency planning to be working pretty closely with our key customers on building in logistics and redundancies. We've got strategic positioning of finished goods, labeling frozen stock, just about everything that you can think of.

So I'll tell you, the team has done a great job so far, and they are fully prepared for either an October decision or a decision beyond that..

Just to mention the impact that we have an our operations in this quarter, it's already impacted from Brexit, although Brexit has not come yet, which is in the labor. I think we are seeing the labor situation in U.K. getting tighter as some immigrants are moving out of the country.

So they are affecting -- we're suffering the effects of the Brexit despite that Brexit has not occurred yet..

[Operator Instructions]. Our next question comes from Jeremy Scott with Mizuho..

Jayson, congratulations on the new role. Just kind of stepping back, you've had 30 beers in the chicken sector. I'm sure you've seen it all. So wonder if you could share a bit on your vision for Pilgrim's over the next 5 years? Your thoughts on business mix in the U.S.

and national priorities for investment and other key areas of focus?.

Yes, thanks for the question, Jeremy. Look, as my mentioned in my prepared remarks, I was part of the team that formed and executed our current strategy. It's the one in which we still in fully today, and just to remind you, that strategy centers around people and food safety, operational excellence.

It's really the fundamentals of our business, having an optimized mix in portfolio, and of course, our key customer strategy, which we have been speaking of over the last 8 years.

The only significant thing that I'll add and this fits squarely into the strength of our mix and our portfolio, Jeremy, is the emphasis on our Prepared Foods business growth and execution. We've left that one lagging behind, and we're definitely going to be spending a significant amount of the resources, Jeremy, in this one area..

And just on your comments on foodservice and retail operators being nervous about the supply of pork going forward.

So I guess, in the conversations that you're having, are operators looking to lock in chicken volumes or contracts further out? Are you seeing any stocking up of product?.

Yes. Thanks for the question, Jeremy. We're not seeing any stocking up of inventory per se. As a matter of fact, we've seen breast meat inventories decline to a level of that of which 2017 numbers. But now really what's happening is they are looking to lock in some adds.

So they're reaching out sort of ahead of schedule and ensuring that there is some supply in the season. So -- again, not seeing anything bought forward. And to the earlier question of Heather, why are we seeing some negativity here on almost when we're hearing about ASF.

We're just not really seeing the impacts that are currently hitting us today, but we are seeing those buyers reach out looking forward the front end of the season. It's earlier than usual..

Okay. And just on your answer to Heather's question around boneless dark meat relative to late quarters, there's there a structural demand shift for both late quarters on global trade and prices keep moving up.

I would assume at some point that your boneless dark meat customers, which are largely domestic, may resist or switch to breast meat, et cetera.

So could you see a scenario where pursuing more bone -- or pursuing more bulk leg quarters makes a lot more sense than boneless?.

For first, I'll tell you that will be a great problem to have. So I'll argue that I have not seen demand destruction yet from dark meat deboning to -- we've actually seen dark meat prices over rusting prices and have been held there consistently. So there's always that chance, but again, I think that would be a good problem to have.

And I'll deal with that problem when we get there..

And Jeremy, I think you've said 30 years you've seen all of it, but I think, this industry is very dynamic and it changes every day. And if we're seeing a change as well in the demand for some of the products as we have more Hispanic and as we have shift in our demographic, we're seeing more demands for dark meat in U.S.

I think there's always the competition with boneless and white meat, but I think it's a change in the demography. I'll add as well that we continue to change our portfolio in having more no-antibiotics-ever in the organic operations and we need to add value to the dark meat on those operations as well.

So exporting just for leg quarters, there's no premium on organic and no premium on no-antibiotics-ever. And as we move to the domestic market, we can capture those premiums..

Jeremy, finally, I'll add this. In many cases, the dark meat on menus is a here-to-stay item. So you can look across even some national QSRs, there's dark meat that's fully embedded in those menus, and they are here to say, and I'll add, growing on menus as well..

Our next question comes from Ken Zaslow with Bank of Montreal..

Jayson, congratulations on the new position. Let me ask you a question. When you look at 2 or 3 years from now, what do you think your biggest contribution would be on a strategic point of view? It sounds like you expect to keep things, kind of, going where they are going.

But what do you expect to do to change the strategy or do anything to leave a legacy?.

Yes. Thanks, Ken. The first one is going to be around people. Having the right people, having a great team here. We have a great team in place and surely about investing energy in people and allowing them to grow. I think that would be my legacy.

I will tell you relative to the business side of things, I mentioned this earlier, is going to be around Prepared Foods' business growth and execution as well as developing our brands..

And then my next question really is -- I guess I only get 2.

So I'll just -- can you frame how you're thinking about the earnings power relative to the history here over the next 12 months? Are we thinking -- are you thinking more like a 2017 type of operating environment? Are you thinking about 2015? Like, how do you see this? Because this is something that we've -- I don't think I've ever seen -- I've only done this 20 years, and I know you beat me out by about 5 or 6 years, it sounds like.

But I haven't seen this type of environment.

Can you talk about how you would frame the environment with African Swine Fever, the U.S.-China deal as well as low commodity -- low feed costs?.

It's so fluid. We know that it's a meaningful disruptor in the pork supply. It's already causing some near-term pork disappearance in the U.S. Our first market impact that we have seen is actually in Mexico, and Fabio mentioned this earlier. The U.S. exported 15% less pork to Mexico on a year-over-year basis.

And this is -- that part and parcel has led to that quick -- we've not seen such a price turnaround in Mexico in the last 8 years that I've been here relative to what's happened. And I have to say that's part of what this ASF has done just in Mexico by having pork removed or at least less pork going down into that market.

So I would say that -- and you said it best, I mean, it's unprecedented. We know that the USDA is reporting and your estimates are calling for a decrease of almost 3 kilograms per capita of pork availability in China '19 over '18, I mean, that's a significant number in availability. Again, I'll just have to back to uncertainty.

I don't think that we know. We know that it has a potential to be a major disruptor in protein to what that effect looks like. Again, I'll go back to your -- this is unprecedented, and I don't think I can put a number on that..

And Ken, I think looking into the long-term perspective, we all know that there is limited opportunity for growth in pork and beef in terms of availability, and the demand for protein will continue to grow in U.S., but even more so in the emerging markets.

And again, if you take the long-term perspective, chicken continues to be the best option for supplying further growth. We can have temporary disruptions in the pork because of diseases or temporary disruptions in some of the markets because of other issues.

But long-term perspective is chicken business to continue to grow to supply the protein that the world will continue to demand, especially on the emerging markets..

Yes. Ken, one other -- I'll just throw the scenario -- China historically only purchases leg quarters when our largest offtaker, which was Russia, was absent from the market. We had large downward corrections in commodity chicken prices. So really haven't seen a normalized market where China has taken U.S. dark meat.

And if there is something that is agreed upon between the 2 governments, I think we're going to see a pretty good infancy of significant impact there. Today, we and the industry have done a very good job of diversifying our country mix and lessening our dependence on any one country. So U.S.

dark meat is not -- is one of -- if it's not the most affordable falsey sources of protein in the world. And should there be agreement with China, our expectations that we're going to be able to export dark meat to China primarily for further processing.

And of course, this is going to have positive impact on that commodity dark meat pricing as we discussed earlier in the U.S., and it will spread to other export markets and the domestic market. Again, what that number looks like? Should there be an agreement? We don't know..

To add to what Jayson just mentioned, despite our ban to export to China right now, we're already seeing prices on the entire region going up. And some exports to countries like Vietnam is up 50% year-over-year..

But just to be clear, Fabio, you said you don't think this could be a structural change to the market. You think this is something that the word will adjust to and you will go back to your long-term growth of chicken consumption. Is that -- I'm just curious if that's what you're thinking..

I think you can have some disruption and you can have some changes in the temporary. But over time, again, chicken continues to be the option for growth in the protein. It can be enhanced by what we're seeing right now, but I think the world's demand and supply will adjust to this as well.

I think it doesn't -- the fact is it does not change the long-term perspective for chicken, which is very, very positive..

Our next question comes from Adam Samuelson with Goldman Sachs..

So maybe first, Jayson, I'd like to continue to -- you made a comment about further more resources and investment on the Prepared Foods side.

We'd just loved to hear may be a little bit more thought if you could share just in terms of that, something where, "Hey, we've got to go and then really make bigger upgrades to our facilities, ourselves? Are we need to make that's going to a bigger target for inorganic growth than it has been here for or something else along that line?.

Thanks, Adam. Yes, it's both human, and I'll call it capital assets that we have to improve upon sales. We've built out our team over the last year or 2, which we didn't have in 2017. So we built out a marketing team and innovation team and research and development team.

We're doing much more work in those areas, where we have not really valued up those areas in the past. So just building out the team and actually putting that team's resources to use will be -- will greatly impact our business in 2019. Again, on the capital side, we'll be investing more capital in our assets in this business.

And again, we've said this too, in terms of our growth strategy, we're going to grow in Prepared Foods as well as geographic areas. Those are the two areas in which we're looking for growth. So both human assets and capital as well, Adam..

Just a bit on the CapEx. Last year, we invested $348 million, which is significantly higher than our depreciation, which demonstrates our commitment to the operational efficiencies to build that differentiated portfolio, just like Jayson mentioned.

For 2019, we're expecting to be in the $280 million range and some projects that we have are what we already mentioned on the automation of our plants. We are building also two new feed mills to improve our live operation, and we're investing also in U.K. in the Ballymena plant to add value-added products..

Okay. That's helpful. And then just I think in your response to Ken's question just before. So just on a China-U.S.

trade deal, I mean, is your sense of ministry contact that you will see the poultry regulations kind of wish it means beyond just the ban from Avian flu from a couple of years ago? We haven't sent leg quarters to China, I think, in meaningful quantity for over a decade.

Did you think those get meaningfully eased? And how quickly do you think that product could be restarted if we did?.

Yes. That's a great question, Adam. I think anytime you're dealing with 2 major governments, timing is never of the essence. Obviously, we would like to see the market open sooner than later. We haven't shipped anything directly to China since 2015. So we're anxious to get those markets open, and should they open, it will make a meaningful difference.

But in terms of timing, Adam, I couldn't even think about....

I guess what I'm really asking, are the plant level certifications in place that they revert back to in case the government is to reach an accord or do we have to then go plant-by-plant to get the certifications reissued? Just like is there a prior framework that we really have that we can just relaunch and restart quickly? Or is it going to take a little bit more time to build that out?.

Yes, thanks for the question. I don't believe that there is a plant-by-plant issue. I think it's a countrywide issue. If the country ban is lifted, then we should be able to export to China, Adam..

Okay. And then just quickly -- I apologize I jumped on late night. I might have missed this, but as we think about some of the cost pressures that you've been facing in Europe, both on the feed and the labor side, did you outline any kind of time line when you think those could flip.

Obviously, if Europe has a better wheat crop in the summer that should help, which is -- did you provide any time line for when you think you should be getting back on the right track from a growth perspective or cost perspective in Europe?.

Yes. So we mentioned in the prepared remarks, we are currently experiencing overhang with that $40 million of increasing green costs. We're just now beginning to see that price capture. And I'll have not only -- we'll be capturing green costs but we're going to beginning to recover the rest of the inflationary items.

So it's not captured in the current models, which are labor, utility, packaging and the other ancillary items. So we're going to see this overhang neutralized by the end of Q2, and we're going to realize the effects of our updated model in the back half of the year.

So I'd argue, Adam, the back half of the year will start to see the margins to improve from the overhang..

This concludes our question-and-answer session. I would like to turn the conference back over to Jayson Penn for any closing remarks..

Thank you. We're off to a solid start in 2019. I believe the outlook for chicken consumption globally remains positive as consumers continue to view chicken as compelling, healthy alternative.

Our diverse portfolio in differentiated products and key customer strategy, in conjunction with our geographic footprint, will continue to generate a more consistent performance and minimize margin volatility compared to peers despite specific market conditions.

We'll continue to identify new opportunities, including Europe, both organically and through acquisitions, to refine our portfolio and offer differentiated customized products, while pursuing our key customer strategy. Our key members are our competitive strength. We are very fortunate for them and will continue to invest in them.

We are also motivated and innovative to improve our quality of our products. We like to thank everyone in the Pilgrim's family as well as our customers. As always, we appreciate your interest in our company..

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect..